Worried your current financials or a bad credit history might get in the way of buying a car?
Reasons finance is turned down
Put simply, lenders are reluctant to lend money to people they consider to have a high chance of not paying it back. Each lender has its own criteria for determining exactly who is approved so there are a number of reasons consumers may be declined for finance, however some of the main reasons are below.
Bad credit history
If you haven't met your credit obligations in the past you might have a bad credit file. This can occur if you've not paid credit cards, loans and even mobile phone bills.
These historical events are used by lenders to identify people who have defaulted on their commitments in the past and are considered more likely to be a 'bad risk' in the future.
If you're concerned you may have a bad credit history, or think there may be an error on your credit file, you can request a copy (a paid and a free option) from Veda Advantage.
There are a range of lenders who will approve consumers with a bad credit history, however check out our Tactics to be aware of so you're informed about some less desirable practices.
TIP: In Australia you get marks against you on your credit file when you do something wrong rather than for you when you do something right (which is the US system). If you're concerned about having "no credit history" but otherwise have a good profile, this should not be a problem in Australia.
If you have an income that is deemed to be lower than a typical minimum cost of living, you may be declined for a loan even if your credit file is in perfect condition. This is because the lender considers there is a chance that you will not be able to meet your living expenses and the burden of the loan repayments on an ongoing basis.
Alternatively, if you have a high income but also have high expenses your financials might suggest you are overcommitted and don't have enough spare income to cover the repayments for the loan you're applying for.
If you're in this situation, alternatives can include:
- Using another asset as additional security for the loan - however remember this puts the asset at risk of being seized if you default on the loan.
- Asking your lender if you can use a guarantor. For example, if you're still at university your parents may be willing to guarantee the loan.
TIP: If you're worried about your financial situation and your debt level, a financial counselor can review your personal situation and give you more specific advice. Find out more on ASIC's Fido website.
Not an Australian Resident
Non-Australian residents are considered risky because leaving the country - and leaving behind unpaid debt - has proved tempting for temporary visitors in the past and burnt the fingers of lenders in the process.
If you're not an Australian resident be prepared to fund part of the purchase price yourself so you also carry some risk.
Young borrowers - young lenders
If you are planning ahead for your first car and want to borrow before you turn 18 you are unlikely to find a legitimate lender without the assistance of parents.
In addition, borrowers just over 18 may also have some difficultly borrowing. Unfortunately like young drivers and car insurance, young lenders have established a similarly reckless reputation with finance, and lenders manage this higher risk by being especially selective about who they lend to in the youngest age groups. Improve your chances by ensuring you have adequate income to cover the finance repayments and a good credit file.
TIP: If you're young, taking out a loan you can't afford to repay could have significant knock on effects. If you get a black mark in your credit file that makes it difficult to get a credit card or home loan down the track it could be a decision you regret for years.
Tactics to be aware of
If you're finding it difficult to get finance approved, you may be more vulnerable to lenders with questionable practices. Below are some real life examples to be aware of.
Car finance sold as a package with an over-priced car
If you’re offered an ‘interest free’ car finance package (and with no credit checks), check the market value of the car before you go any further. The company may be able to make loss on the cost of providing finance if the margin they make on the car is high enough. The finance costs may be bundled into the purchase price of the car and could be well above what you would otherwise be prepared to pay.
Check the market rate of a car you're considering buying by searching the cars for sale for similar models or using our car values tool to check the car's value.
Falsification to get finance approved
If you’re completing a loan application in the company of a third party, such as a broker or dealer, and are being encouraged to adjust your financials to increase the chances of approved, be careful. Not only could you be breaching the finance contract and committing fraud, but you could also put yourself at risk of over committing to a loan you can’t afford
Information about the loan
When you get a car loan, the lender is required to give you a minimum amount of information in writing that includes the items below. Be wary if your lender is not transparent about the costs of the loan, including:
- The exact amount being borrowed
- The interest rate
- Fees and charges associated with the loan
- The repayment amount you’re required to make, and for how long
If you’re finding it difficult to figure out the total cost of a loan, calculate the amount you’ll make in repayments over the full term by simply multiplying the repayment amount by the number of repayments. Understanding the total ‘pay back’ amount will give you an indication of how much you’ll pay above the initial amount you borrowed for the car.
TIP: Don’t go car shopping without knowing your finance options beforehand. You’ll be more informed and able to recognise deals that could end up costing you a fortune.
How do I choose a lender I can trust?
If you're choosing an alternative lender it can be difficult to know who to trust, especially if you're doing it for the first time.
Check if they are listed as a member with the Credit Ombudsman Service. While this does not mean you are necessarily getting a good deal on your finance, if there is an eligible dispute, you will have some independent assistance.